Commentary on Economics, Information and Human Action

Yesterday the Energy Information Administration released the results of its analysis of possible price effects from increased natural gas exports, and the Wall Street Journal finds the drama (“Gas Prices Could Rise With Exports”):

Increased exports of U.S. natural gas could drive up domestic gas prices as much as 54% in 2018, federal officials said Thursday, in a projection that could complicate efforts by more than a half-dozen companies hoping to spend billions of dollars on new export terminals.

Sounds like a disaster for U.S. natural gas consumers, and that is the impression that some U.S. manufacturing companies would like you to form about possible natural gas exports.

If you read through the article, you pick up the slimmest bits of context: the 54 percent number is from just one of several scenarios studied, that scenario one assuming the lowest level of increased gas production and the fastest imaginable increase in exports; and current gas prices are below $3 per million BTU, the lowest in a decade. Also, the 54 percent is the peak price effect in the scenario, for 2018, but prices retreat after 2018 as the higher price sparks additional production.

EIA expects prices to recover over the next few years, even without exports, to just under $5 by 2018 in mid-line cases and to $6 for low gas production scenarios. Worst case prices (from consumers’ viewpoint) could average around $9 in 2018, then prices fall back toward $6. More likely scenarios have much more moderate price effects.

The EIA makes another interesting point in the report introduction. For all practical purposes, the export licensing requirement is only a big issue for trade with countries for which we are not in a free trade agreement. Under our free trade agreements, any proposed export is already deemed to be in the public interest and so satisfies the export licensing review standard.

So, let’s imagine the most successful anti-natural gas export political scenario: LNG export licenses get denied, Canada stops exporting gas to the U.S. because of low U.S. prices (already happening) and then starts importing gas from the U.S. Canadian companies build LNG export facilities on the Pacific and Atlantic coasts, buy low cost U.S. gas and exports high priced LNG to Asian and European markets. We already are net natural gas exporters to Mexico, and Mexican companies could provide the same kind of import/export service.

Else domestic industrial natural gas consumers – the primary interest group raising objections to potential LNG exports – will have to take on amendments to our current free trade agreements. I’d judge that unlikely, at least for now.